U.S. Scrutiny For Yahoo, Google Search Test

The U.S. Justice Department is investigating possible antitrust implications of Google's two-week test with Yahoo to combine some of their Web search and advertising business, a source informed about the matter told Reuters on Wednesday.

The Justice Department is concerned that the test may violate antitrust law, the source said, adding that authorities "have initiated an investigation" of it.

The source, who spoke on condition of anonymity, said some of the government's concern focused on a telephone call from Google (NASDAQ: GOOG) CEO Eric Schmidt to Yahoo (NASDAQ: YHOO) Chief Executive Jerry Yang to offer help in thwarting Microsoft's $44.6 billion takeover bid.

A second source said that the Justice Department was concerned about a longer-term deal, and had an initial inquiry underway into the matter.

Google and Yahoo told Reuters they had told the Justice Department about their two-week test.

"We informed the Justice Department before we launched this test and we have been responsive to their questions about it," said Google spokesman Adam Kovacevich.

Yahoo spokeswoman Tracy Schmaler said: "Yahoo proactively kept the Department of Justice informed of its intentions to conduct this limited test with Google and have provided information to DOJ on the nature of the test."

Justice Department spokeswoman Gina Talamona would only say that the department was "aware of the collaboration."

The initial test is small, covering only 3 percent of Web searches performed on Yahoo, the companies have said.

Google is the top search engine with 63 percent of searches, and No. 2 Yahoo has 17 percent, a combined 80 percent of the market, according to ratings company Hitwise.

Philip Bromiley, who teaches law at the University of California at Irvine, said that kind of clout meant that companies could sharply raise rates it charges advertisers. "Any industry when you start to see that kind of figure, you're going to have antitrust arguments," he said.

Yahoo President Susan Decker told Wall Street analysts, during a conference call held Tuesday to discuss quarterly results, that it was too early to say whether Yahoo would reach a deal to turn over some part of the company's Web search advertising business to rival-turned-Microsoft-counterweight Google.

"It's premature to speculate on what options we may ultimately pursue or whether some form of arrangement might result," Decker said.

Google shares closed down 1.5 percent to $546.49 in regular trading on Wednesday, while Yahoo, which posted strong earnings yesterday, finished down 1.6 percent to $28.08, both on NASDAQ.